The Supreme Court today directed Indian subsidiaries of foreign companies employing expatriates to deduct tax at source on their entire salary just as domestic companies do.

The order has sent a frisson through industry and caps a prolonged litigation on the issue that dates back to 2000.

The judgment which was read out in court but hasnt yet been issued ends a long-drawn dispute between the income tax department and several Japanese, Korean and European companies.

Expatriate employees showed only a part of their income in India while the rest was paid outside the country by the foreign parent and was, therefore, kept outside the reach of the taxman.

The tax authorities had argued that if they were employed in the country, all of their income was taxable.

The Supreme Court order upheld an appeal filed by the income tax department against orders passed by the Income Tax Appellate Tribunal between 2000 and 2003 and Delhi High Court in 2004. They had ruled that the local subsidiaries were not liable to deduct tax on salaries paid to expatriates by their foreign parents outside India.

Subramonium Prasad, a lawyer, said the court had laid down guidelines with respect to TDS on expat salaries.

Mavens said expatriate employees who had paid advance tax on their own or made some other arrangements to pay tax would no longer be allowed to do so. Istead, the companies will have to deduct 30 per cent by way of TDS.

Foreign companies will now have to collect tax on that portion of salary that was being paid abroad on a monthly basis and add it to the tax that was being deducted on salaries paid in India for services rendered here. The two components will have to be clubbed to pay the TDS on a monthly basis. Several expatriates who were paying advance tax on their own did so on a quarterly basis, said PricewaterhouseCoopers executive director Rahul Garg.

The Supreme Court also said that no penalties would be levied on these companies for not paying TDS in the past.

While foreign companies are now liable to pay tax, the court has given them relief with respect to penalties. It felt that the matter was complex and there was reasonable cause on the part of the companies for not deducting tax at source in the past, said Ernst & Young tax partner (human capital) Amitabh Singh.